The real secret to making money and reaching financial independence is not staying an employee, but starting a company and quickly developing it. “Rich Dad’s Before You Quit Your Job” is for aspiring entrepreneurs who need to know how to take those first crucial steps.
Book Excerpt:Continued from Page 2
Rich Dad’s Before You
Quit Your Job: 10 Real-Life Lessons Every Entrepreneur Should Know About Building a Multimillion-Dollar Business
by Robert T. Kiyosaki and Sharon L. Lechter C.P.A.
What Kind of Business Do You Want to Build?
As part of my entrepreneurial training with rich dad, he encouraged his son and me to go out and study as many different types of business systems as we could. He said, “How can you be an entrepreneur designing a business if you do not know about the different types of businesses and entrepreneurs?”
Rich dad was adamant in explaining that many entrepreneurs were not business owners but self-employed entrepreneurs-entrepreneurs who owned a job, not a business. He said, “You are probably self-employed when your name is the name of the business; your income stops if you stop working; if clients come to see you; your employees call you if there is a problem. You may also be self-employed if you are the smartest, most talented, or the best educated person in your business.”
He had nothing against self-employed entrepreneurs. He simply wanted us to know the difference between entrepreneurs who own businesses and those who own jobs. Consultants, musicians, actors, cleaning people, restaurant owners, small shop owners, and most small business people fall into owning jobs instead of businesses, or the S quadrant.
The main point rich dad was making about the difference between a self-employed entrepreneur and a big-business entrepreneur was that many self-employed businesses have a tough time growing into a big business. In other words they have a real challenge going from the S quadrant to the B quadrant. Why? Again the answer is that the business was poorly designed before there was a business. It was doomed before it was even started.
Rich dad himself started out as a self-employed entrepreneur in the S quadrant. Yet in his mind, he was designing a very large business, run by people much smarter and more capable than him. Before he started his business, he designed his S quadrant business to be able to grow into the B quadrant.
Professionals and Tradespeople
He also wanted us to know that many professional people such as doctors, lawyers, accountants, architects, plumbers, and electricians started a self-employed style of business based on a profession or a technical trade. Many of these professions and trades require government licenses to operate. Also included in this category are professional salespeople, many of whom are licensed independent consultants, such as real estate, insurance, and securities salespeople. Many of these types of people are technically self-employed entrepreneurs, aka independent contractors.
The problem with this type of business is that there is not really a business to sell because there really isn’t a business outside the individual owner. In many cases, there really isn’t an asset. The business owner is the asset. If he or she does sell, he or she will not typically get the higher multiples a true B quadrant business can command. In addition, he or she may have to agree to “stay on” for the successful continuation of the business. In essence they go from being the owner to the buyer’s employee.
In my rich dad’s mind, it made no sense to work hard and not build an asset. This is why he advised his son and me against ever wanting to become employees. He said, “Why work hard building nothing?”
Later in this book, we will go into some ways this type of entrepreneur can create a business asset-an asset they can build and maybe sell someday.
Mom and Pop Operations
A very large category of entrepreneurs is often referred to as Mom and Pop businesses. This type of business gets its name because many small businesses are family businesses. As an example, my mom’s mom owned a little convenience store that the family took turns working in.
The challenge for growth in a Mom and Pop operation is nepotism. Many people put their children in charge of the business, even though their children may be incompetent, because blood is thicker than water. Often the children don’t share the passion for the business that their parents had or they don’t have the entrepreneurial drive to lead the business.
A franchise, such as McDonald’s, is in theory a turnkey operation. The entrepreneur sells a ready-made business to a person who does not want to go through the creative and development phase of starting a business. It’s like being an instant entrepreneur. One advantage to some franchises is that banks are more inclined to lend money to someone who wants to buy a franchise than to a person who wants to start a business from scratch. The banks are more comfortable with the successful track record of other similar franchises and the banks value the mentoring programs that most franchises have to assist the new entrepreneur.
One of the biggest problems with big-name franchises is that they are generally more expensive to get into and have little flexibility for a want-to-be entrepreneur. Franchises are the type of businesses that typically face legal issues and often end up in court. These fights are some of the most vicious fights in the business world.
Reportedly one of the main reasons for fighting is that people who buy a franchise business do not want to run it the way the franchisor, the person who created the business, wants them to run it. Another reason is if the franchise does not do well financially, the franchisee wants to blame the franchisor for the lack of business success. If you do not want to follow the directions of the franchisor to a tee, it is best you design, create, and start your own business.
Network Marketing and Direct Sales
The network marketing and direct sales industry is recognized by many to be the fastest-growing business model in the world today. It is also the most controversial. Many people still have a negative reaction, claiming that many network marketing organizations are pyramid schemes. Yet in reality, the biggest pyramid scheme in the world is the traditional big business corporation, with one person at the top and all the workers below.
Everyone who wants to be an entrepreneur should take a look at a network marketing business. Some of the biggest Fortune 500 companies, such as CitiBank, Avon, Levis, and Smith Barney, distribute their products through a network marketing or direct sales system.
We are not members of any one network marketing or direct marketing business, but we do speak favorably of the industry. People who want to be entrepreneurs should consider joining one of these businesses before they quit their jobs. Why? Many of these companies provide essential sales, business building, and leadership skills not found anywhere else. One of the most valuable benefits from associating with a reputable organization is that it teaches the mind-set as well as the courage required to become an entrepreneur. You will also become more familiar with the systems required to build a successful business. The entry fee is typically quite reasonable and the education can be priceless. (To further explain the educational value of such types of business, we wrote a small book entitled The Business School: For People Who Like Helping People [Warner Books]. For more information on this book, please go to our website, www.Richdad.com.)
If I were starting my entrepreneurial career all over again, I would start with a network marketing or direct sales business, not for the money but for the real world business training I could receive, training similar to the type of training my rich dad gave me.
One of the more interesting discussions Mike and I had with rich dad involved the subject of entrepreneurs stealing from other entrepreneurs. Rich dad used an accountant working for an accounting firm as an example. One day the accountant, who was an employee of the firm, resigned and started his own business with clients he met while an employee of the firm. In other words, the accountant walked out the firm’s door, but took the business with him. Rich dad said, “While this may not be illegal, it still is stealing.” While this is one type of business design, it is definitely not the kind of entrepreneur he wanted his son and me to be.
The type of entrepreneur he wanted us to be was a creative entrepreneur like Thomas Edison, Walt Disney, or Steven Jobs. Rich dad said, “It is easy to be a small entrepreneur, like a Mom and Pop sandwich shop. It is also relatively easy to be an entrepreneur in a trade or a profession, such as a plumber or dentist. Also it is easy to be a competitive entrepreneur, someone who sees a good idea, copies the idea, and then competes against the entrepreneur who created the idea.” (In the Rich Dad’s Advisors book Protecting Your #1 Asset [Warner Books], Michael Lechter refers to this type of competitor as “spoilers” and “pirates.”) This is what happened to me when I pioneered the nylon and Velcro wallet business. Once we created the market and the awareness of this product line, competitors came out of the woodwork and my little business was squashed. Of course I cannot blame them. I can only blame myself because once again, I designed the business poorly before there was a business.
Even though I took a pounding, rich dad was happy that I was learning to be a creative entrepreneur, rather than a competitive one. He said, “Some entrepreneurs win by creating. Other entrepreneurs win by copying and competing.” He also said, “The riskiest of all types of entrepreneur is the creative entrepreneur, also known as an innovator.”
“Why is the creative entrepreneur the riskiest type to be?” I asked. “Because being creative means you are often a pioneer. It is easy to copy a successful and proven product. It is also less risky. If you learn to innovate, create, or invent your way to success, you are an entrepreneur creating new value rather than an entrepreneur who wins by copying.”
Public and Private
The vast majority of businesses large and small are private companies. A large private company is often referred to as a closely held company. That generally means a company owned by just a few owners, and ownership interests are not available to the public at large.
A public company is a company that sells shares of the business to the public at large, most often through stockbrokers and other licensed securities dealers. A public company sells its shares on a stock exchange like the New York Stock Exchange and operates under much more stringent rules than private companies.
Rich dad never formed a public company, yet he recommended that Mike and I create one, as part of our development as entrepreneurs. In 1996, at the same time we were forming The Rich Dad Company, I was also an investor and involved in forming three public companies. One company was created to explore for oil, one for gold, and one for silver. The oil company failed even though it struck oil, which is a story in itself. The gold and silver companies did find substantial amounts of the gold and silver they were looking for. Although the oil company failed, the gold and silver companies made the investors a lot of money.
Working on developing the public companies was a great experience. As rich dad suggested, I learned a lot and became a better entrepreneur in the process. I found out that the rules are a lot tougher for a public company, that a public company is actually two different companies serving two different customers-the real customers and the investors-as well as serving two bosses, the board of directors and the government securities agency, such as the SEC, the Securities Exchange Commission. I also found out about tougher accounting standards and tougher reporting standards.
When I was first starting out as an entrepreneur, rich dad said, “The dream of many entrepreneurs is to see the company they formed listed on the stock exchange.” Yet, after the Enron, Arthur Anderson, Worldcom, and Martha Stewart scandals the rules became tighter and the compliance requirements much more complicated and expensive. The government was breathing down public companies’ backs. Building a public company business wasn’t as much fun as I had expected. Even though I learned a lot, made myself and our investors a lot of money, became a better entrepreneur, learned how to design a public company, and was glad I went through the learning process, I doubt if I will ever form a public company again. That type of business is for a different type of entrepreneur. I can make more money and have more fun in small closely held private businesses. (If you are interested in more information on the pros and cons of private businesses and public companies we recommend the Rich Dad’s Advisors book OPM Other People’s Money, by Michael Lechter (Warner Business Books, 2005).
Can Anyone Be an Entrepreneur?
Rich dad wanted his son and me to understand that anyone could be an entrepreneur. Being an entrepreneur was not that special. He did not want the idea of being an entrepreneur to go to our heads. He did not want us looking down on anyone or thinking we were better than other people if we became successful entrepreneurs.
To this he said, “Anyone can be an entrepreneur. Your neighborhood babysitter is an entrepreneur. So was Henry Ford, founder of the Ford Motor Company. Anyone with a little initiative can be an entrepreneur. So don’t think entrepreneurs are special or better than other people. Your job is to decide which entrepreneur you most want to be like-the babysitter or Henry Ford? They both provide a valuable product or service. Both are important to their customers. Yet they operate in very different spectrums, different bandwidths of entrepreneurship. It’s like the difference between sandlot football, high school football, college football, and professional football.”
With that example, I understood the point rich dad was making. When I was in college in New York, playing college football, our team had the opportunity to practice with a few players from a professional football team, the New York Jets. It was a very humbling experience. It was soon obvious to all of us on the college football team that while we played the same game as the pro players, we were playing it at a completely different level of play.
As a linebacker, my first rude awakening was trying to tackle a New York Jets running back coming through the line. I doubt if he even knew I hit him. He ran right over me. It felt like I was trying to tackle a charging rhino. I did not hurt him but he definitely hurt me. That running back and I were about the same size. But after trying to tackle him, I realized the difference was not physical. It was spiritual. He had the heart, the desire, and gift of natural talent to be a great player.
The lesson I learned that day is that we both played the same game, but we were not playing at the same level of play. The same is true in the business world and the game of entrepreneurship. We can all be entrepreneurs. Being an entrepreneur is not that big a deal. A better question to be asked in designing a business is, “At what level of play do you want to play the game?”
Today, older and wiser, I do not have illusions that I would ever be as great an entrepreneur as Thomas Edison, Henry Ford, Steven Jobs, or Walt Disney. Yet I can still learn from them and use them as mentors and role models. And that is rich dad’s entrepreneurial lesson #1: “A successful business is created before there is a business.”
The most important job of an entrepreneur is to design the business before there is a business.
Copyright © 2005 by Robert T. Kiyosaki with Sharon L. Lechter.